World trade is moving into a less risk-intensive period, with the impact of federal tapering in particular being less than anticipated.
Continued stability in higher-income countries will lead to them assuming a larger share of global imports than at any stage since before the crisis, spurring an acceleration in the growth of trade worldwide.
However, due to lower commodity prices, the value of world trade growth is less than it was before 2008.
These were the views shared by Andrew Burns, manager of the global macroeconomic trends team at the World Bank, at the IFC’s trade and supply chain seminar in Washington DC this week.
GTR was in the audience as Burns said that imports to high income countries are likely to top US$7.7tn in the three years from 2014, up from US$4th from 2010 to 2013.
The definitive risks that the global economy has faced since 2010 – the eurozone crisis, the threat of the US fiscal cliff, the end of quantitative easing – still exist but, according to Burns, the most affected economies have come out the other side in relatively good shape.
The purchasing managers index (PMI – a generally accepted indicator as to the health of manufacturing), shows strong recovery in the EU, US and Japan over the past 12 months. Unemployment is still unusually high in many eurozone countries, but in recent months, it has fallen in Greece, Spain, Ireland and Italy and is beginning to come down everywhere.
While the benefits won’t be felt by those on the ground yet (in Greece and Spain the national unemployment rate still tops 20%), it indicates that the vicious circle that plagued Europe in recent years is coming to an end. Since 2008, weak demand has led to job losses. With increased employment though, demand should be stimulated.
“Even if high income countries are growing at 2% or 3%, the implications for global trade are big,” said Burns.
He said that the Fed tapering, whereby the US Federal Reserve ended its programme of quantitative easing and increase interest rates, has had a fraction of the expected impact.
Much of the effect was absorbed last year, having been built into economic plans and forecasts, and was felt in regions in which the capital inflows are based more around portfolios than foreign direct investment (such as Sub-Saharan Africa and Europe), since these are more impacted by interest rate fluctuations.
The main areas of concern now to be faced are in China, where growth is slowing, and Ukraine and Russia, where the political situation shows no sign of improving.
In the case of China, the government set out last year to restructure its economy from an investment and export-led model to a consumption-led model. This has explained the slowing in growth, with less cheap credit being made available by Beijing for investment projects.
However, the government has since shown nerviness in announcing further waves of fiscal stimulation. In Q1, a range of investment projects were launched, the impact of which will be felt in Q3 and Q4 of this year. While this will lead to an uptick in Chinese growth, it will also increase its level of indebtedness. A financial crisis in China based on an overabundance of cheap credit would be much more concerning than slow growth, said Burns.
The main risk that could emerge from the Russian-Ukraine crisis is the unnerving of investors. It is unlikely that, unless the situation deteriorates drastically, oil and gas flows will halt between Russia and Europe.
Furthermore, while Russia and Ukraine combined produce 15% of the world’s grain and maize, much of this is used domestically (indeed, only 7% of the world’s grain is exported). A lag in production is likely to hit non-grain producing regions such as the Middle East and North Africa, but unlikely to have a major drain on world economic growth.
Instead, the withdrawal of investors may prove to hold the biggest risk, since it would almost certainly lead to severe downturns in both countries, the effects of which would resonate widely.